Why Income Inequality Is the Wrong Question

People who worry about income inequality “in and of itself” are focusing on the wrong question, professor Rajshree Agarwal argues in a new paper from the University of Maryland’s Robert H. Smith School of Business.

She and a co-author from Florida State University lay out an alternate perspective that shifts the focus from wealth distribution to wealth creation. “Economic value creators worry less about how the pie is sliced,” Agarwal says. “They worry more about how the pie is made in the first place, so they can make more pies and more varieties.”

Writing in the Academy of Management Review, the authors distinguish income inequality — the uneven distribution of wealth — from other social concepts, including poverty and income mobility. 

“We question the focus on income inequality in and of itself and government intervention as a means to this end,” they write. “A belief that more should be done for the poor and to advance upward income mobility is not addressed by a focus on income inequality.”

People who conflate the concepts assume that society has a limited amount of wealth to distribute, so more for one person means less for another. The authors focus instead on economic growth through enterprise and markets — not a “fixed pie” distribution that creates haves and have-nots.

Unequal outcomes are a necessary part of this process, which is messy and often ends in failure. But society wins overall when heterogeneous individuals and firms pursue different visions, take risks and engage in economic experimentation.

“Rather than being wasteful, this process is core to economic value creation,” the authors write.

Citing economics and management research, they further argue that efforts to reduce income inequality through government intervention run counter to the principles of political equality.

Such oversight may start with good intentions, but it invites uneven treatment by government and ultimately leads to cronyism.

Once the social planning begins, people already in power quickly learn how to turn the favoritism to their advantage. Using the same tools designed to help the poor, they serve themselves through subsidies, tax concessions and regulatory barriers against new market entrants.

“Government intervention to force greater income equality invites interest groups at both ends of the distribution to use political power to advance their own ends,” the authors write.

Even if government officials and their friends could always be benevolent rather than self-interested, they would lack the omniscience necessary to command an economy efficiently. “Social planners lack requisite information,” the authors write.

Their paper, a response to a 2018 review of three books on income inequality, calls for more scholarly attention to issues of poverty, income mobility and political equality.

“Absent conflation with these issues, we provide the alternative perspective that a focus on income inequality is unwarranted,” they write. “We call for a deep reformation of the mixed economy’s status quo.”

Read more: "Let’s Not Focus on Income Inequality," by Rajshree Agarwal and R. Michael Holmes Jr. at Florida State University, is featured in Academy of Management Review.